Given the pounding Apple has taken of late, there seems to be an element of piling on in the spate of articles and surveys pronouncing its fall from grace. So it is hardly surprising that Barron's, one of the most respected analytical and commentary investment publications has joined the mob.
What makes Barron's ranking of particular interest, however, is precisely that its point of view reflects that of the investor, not necessarily that of the business executive or manager. Given that the investment mantra 'the trend is your friend,' meaning dont bet against popular market wisdom, this is consistent with what might be expected from that source. But there are a number of mixed messages in this analysis that bear scrutiny - and warning.
That Sound Business Strategy, Strong Management and Ethical Business Practices top the list of attributes Barron's survey respondents cited as elemental to their perceptions suggests that they share the more widely voiced concerns about Apple's leadership. Whether these are fair and accurate or still reflective of the post-Steve mourning period is a pertinent question. There is little doubt that Tim Cook is a talented and competent executive. But he is not Steve, never will be and can not be forgiven for that by some. It is also interesting that after several years in which design was annointed strategic differentiator-in-chief, it seems to have lost some of its magical powers. This does not mean that design is no longer important, but it does raise questions about the complex interplay between design and personality in a corporate context.
What is also intriguing is that Apple was dethroned not by some other tech avatar or energy industry behemoth, but by an investment vehicle, albeit a special one. Berkshire Hathaway, under Warren Buffett's leadership, has become an iconic picker and manager of investments. He is the avuncular sage of the financial world, one of the world's richest men and someone who occasionally shows some heart for those less fortunate. BH is, however, a paragon of financialization. In that regard, it may well be a signal that the financial industry thinks it once again has a brighter future than any other corner of the economy. Which, if you care about jobs, growth, income distribution and stability, is not necessarily a welcome sign. JL
Vito Racanelli reports in Barrons:
Apple's reign is over. Its remarkable three-year hold on the throne of Barron's annual ranking of the world's most respected companies is history. No longer the apple of the market's eye, the immensely successful maker of iPads, iPhones, and Mac computers slipped to third place in the 2013 survey.
And proving that comebacks are possible even for an 82-year-old CEO, Warren Buffett's Berkshire Hathaway (ticker: BRK/A) came out on top this year, up from a No. 15 finish in 2012 -- the only time in this ranking's nine-year history that it finished out of the top five.
The relationship between respect for a corporation and the qualities that define it -- stock performance being primary among them -- resembles that of the chicken and the egg. To some extent, then, the market's rekindled fondness for Berkshire this year has to do with its stock price, up about 25% and double the rise of the S&P 500 stock index.
Buffett's firm has regained its footing of late and is hitting on all cylinders operationally, investment-wise, and in its deal-making. Investors we spoke to attributed their respect to Buffett's record of strong returns, business acumen, long-term focus, and plain-talking style.
Like this year's winner, both Walt Disney (DIS), at No. 2, and Google (GOOG), No. 4, rose materially in the estimation of our survey takers, with the entertainment giant and the global Internet search firm putting in their best finishes ever.
Disney's powerful brand and track record, combined with no significant missteps and a surge in profits, have all had a hand in the company's move up the respect ladder. Google, meanwhile, received points for strong innovation, the success of its Android mobile-phone operating system, disrupting markets it chooses to enter -- and generally taking advantage of Apple's stumble.
Having a strong brand name also didn't hurt this year when it came to entering the top decile, which includes Coca-Cola (KO) at No. 5, up from No. 8. Five of the top eight in the ranking are owners of the most valuable brands in the world, according to a recent study done by BrandZ: Apple, Google, IBM (IBM), McDonald's (MCD), and Coke.
Apple wasn't the only top company to lose face. McDonald's fell to eighth from third last year, while IBM dropped to tenth place from second.
EACH YEAR SINCE 2005, Barron's has surveyed professional money managers about their views of the world's 100 largest companies by market value. The latest assessment, conducted in late May and early June with the help of Beta Research in Syosset, N.Y., elicited responses from 87 investors across the U.S., ranging from managers at smaller advisory firms to chief investment officers at money-management giants overseeing billions of dollars. (The top 100 firms were considered for ranking based on their respective stock-market values as of April 15 as determined by Dow Jones Indexes.)
Participants were asked to select one of four attributes reflecting their view of each company: Highly Respect, Respect, Respect Somewhat, or Don't Respect. A point value was assigned to each response, with the highest accorded to Highly Respect, and a mean score was tabulated for each company. In the case of ties, the higher ranking went to the company with the most Highly Respect votes. The managers also were asked to rank the factors they consider most important in determining respect for corporations, and were invited to contribute comments on individual companies.
Some choose to include a mix of traditional financial investment measures. For example, Craig Giventer of Financial Partners Capital Management uses the following criteria: Does the firm have a defensible long-term business model, and is it built to innovate, compete, and grow? And how good is management, particularly when it comes to capital allocation?
Still other investors use broader and what some might term "squishy" concepts that are harder to define, such as value to society in general and the stakeholder approach, which includes treatment of employees and customers, among other things, rather than just the shareholders' view.
Peter Scholla, a partner at Global Investment Adviser, says that "more and more, acting in a socially responsible manner and corporate culture are important" for respect. It's what you do when no one is looking, he says. Still, Scholla adds that "if I tell my clients a company is doing well on social responsibility but the stock price hasn't, they will not be happy."
Berkshire and Buffett received high-respect scores from a wide swath of managers employing a diverse variety of investment styles. The mean score was 3.88, and few gave it Don't Respect votes. (See table: Respectfully Yours -- The Top 100.)
Not many conglomerates receive such praise. Buffett's firm is an unusual, eclectic mix of operating subsidiaries in insurance, rails, candy, and other plain-vanilla businesses, combined with large, nonoperational stakes in big-name firms. Some call it a mutual fund masquerading as a company.
Nevertheless, says Jack De Gan, CIO of Harbor Advisory in Portsmouth, N.H., "It's a well-conceived business model, owning good basic businesses, bought at good prices, and managed by great people. A company much to be respected."
It's hard to top that.
Interestingly, Berkshire owns significant stakes in a number of companies that also rank high on the list, such as Coke; IBM; American Express (AXP), No. 19; Procter & Gamble (PG), No. 21; Wal-Mart Stores (WMT), No. 23; and Wells Fargo (WFC), No. 27. The last was the highest-ranked bank in the survey this year. (More on that below.)
As popular as Buffett and Berkshire seem to be, they aren't without detractors. His public advocacy that the rich should pay higher taxes still rubs some the wrong way. "It's difficult to be enthusiastic about a company whose head wants to increase other people's taxes," grouses Adrian Day of his eponymous asset-management firm in Annapolis, Md.
THE DROP IN RESPECT for the Cupertino, Calif.–based Apple can be attributed to a number of issues that have arisen in the past 12 months or so. Besides a poorly acting stock price -- down 45% from its high, to $390 last week -- there is a growing feeling on the part of both investors and, perhaps more importantly, consumers that Apple has lost some of its product mojo.
The success of the Galaxy mobile phones made by Samsung Electronics (005930.Korea) has torn the cloak of invincibility from Apple's iPhones and in no small part helped Samsung in this survey, up to No. 18 from No. 36 last year.
Moreover, Apple has had continuing regulatory and tax issues with Washington, D.C.; gone through patent battles with Samsung; and endured a loud and distracting debate about what it should do with its prodigious cash. By comparison, Google is getting more points for innovation lately, and after the introduction of Google glass, Apple looks rather late to the party for wearable devices. It's possible that the death of Steve Jobs in 2011 still gives some investors pause.
What Inspires Respect?*
"Sound business strategy" is key say 38% of respondents.
In light of the serious troubles Apple has encountered lately, it's a wonder the company didn't fall further in our ranks. Apple's nonoperational problems are probably not the biggest bugaboo with investors; it's the company's flagging product pre-eminence. Apple has been the dominant player, points out Seth Shalov, a portfolio manager with MAI Wealth Advisors. But, "Rivals have caught up with it on the iPhone and iPad. The hope is that the new products will be successful."
Sound business strategy 38% Strong management 22 Ethical business practices 21 Product innovation 5 Competitive edge 5 Revenue and profit growth 5 Strong balance sheet 1 Other 5 *Total doesn't equal 100 because of rounding
"It is a challenge to keep innovating," adds Ichiro Ishiguro, with Hermes Fund Managers. "How can they keep innovating going forward?...It is key to their value."
Apple's problems have so far proved to be Google's opportunity.
Lately, Google appears to be ahead of the game. Giventer of Financial Partners Capital, which owns shares of Google, gives it high-respect scores. "Its dominant position in search has allowed it to innovate and disrupt both adjacent businesses and markets where they don't have a historical foundation." Like hockey great Wayne Gretzky, Google "skates to where the puck is going to be," he adds.
Paul J. Jackson, who runs Paul J. Jackson & Associates in Boston, concurs. Google challenges existing thinking, and that becomes reflected in the share price, he says. "Google's eating Apple's lunch."
As noted, Samsung, which uses Google's Android mobile-phone operating system, has also profited from Apple lapses. "It has out-Appled Apple," quips Peter Scholtz, president of Scholtz & Co., "with not only products that are highly competitive but at cheaper prices and with a full array of price points," he says. Samsung is that rare conglomerate that looks to innovate, he adds.
DISNEY'S BIG SPLASH, at No. 2, brought it close to Berkshire, with a mean score of 3.81. Disney's profit surge has been broad-based, coming from theme parks and the ESPN cable network, as well as the film studio. Ronald Doyle, a portfolio manager at MeadowBrook Investment Advisors, gives Disney high praise. It has "a really good strategy and a tremendous infrastructure to deliver to the consumer all the brands which are its franchises, whether developed internally or acquired, such as Lucasfilm."
Among other highly respected companies, Amazon.com (AMZN) dropped to No. 6 from No. 4, though it continues to garner kudos from investors. Meanwhile, Johnson & Johnson (JNJ) has quietly clawed its way back toward the top, rising to No. 13 from No. 32.
The health-care giant had stellar respect rankings until 2011, winning three of four years from 2006 to 2010, but then suffered from a series of manufacturing and quality-control problems. This year, J&J's stock price is beating the S&P 500 index significantly, perhaps bringing back some of the luster and respect that J&J used to earn.
Among industry groups in this year's ranking, banks -- with the exception of Wells Fargo, which is a more-traditional domestic lender rather than a global capital-markets and financial-services power -- continue to be held in low esteem. That's probably a lingering residue from their collective performance in the financial crisis of 2008-09. You would have to go back to 2006 to find a global bank in our top 10.
In particular, the best finish by a big global bank was middle of the pack -- JPMorgan Chase (JPM), No. 45, up from No. 49 in 2012. Last year, the bank suffered, in part, from the infamous multibillion-dollar London Whale trading loss. This year, while our ballots were out, the bank's Chairman and CEO Jamie Dimon was battling to keep both his positions at the bank, a fight he eventually won.
Despite the mediocre ranking for his company, the high-profile bank executive isn't without his admirers. "How many CEOs would have come out front and center and said, 'This is my fault' " on the Whale losses, says Jackson. "If he weren't at the helm, you have to think long and hard whether you want to be in this stock," he adds.
Among banks globally, Canadian banks, which came through the 2008-09 crisis in good shape, received higher respect scores than most of the U.S. banks and financials from other countries.
Investors still have not forgiven Citigroup (C), No. 91, and Bank of America (BAC), No. 92, for their role in the crisis. They continue to be dissed, despite improvements in their financial health. As happened last year, both have sizable Don't Respect scores, and they rub shoulders with perennial cellar dwellers in the ranking, such as Russian and Chinese companies. These have historically gotten little respect, mainly for weak rule of law domestically and poor transparency, among other issues.
Global health-care companies, with the exception of J&J, continue to be ignored by investors. For the most part, they received unimpressive marks. Tobacco companies traditionally score poorly in our ranking, and there was no change. As one money manager put it, "It's hard to respect companies that kill their customers."
While smoking is an anathema to most, booze isn't. Spirits makers like Diageo (DEO) and LVMH (MC.France) made impressive gains this year, to No. 29 from No. 50, and to No. 31 from No. 41, respectively.
AS THEY ARE EACH YEAR, respondents were asked to rank the following characteristics of a highly respected company: strong management, sound business strategy, ethical business practices, product innovation, and more temporal markers such as revenue growth and stock performance.
This year, the concept of sound business strategy is tops and has traded places with strong management, No. 1 last year. Ethical business practices remained third, even as many investors we interviewed evidenced strong interest in the stakeholder approach to respect.
This survey has traditionally skewed toward U.S. firms, particularly those with well-known or household names. This shouldn't be surprising, as we're playing on the home court here: The investors we polled are based in the U.S. and, to a large extent, focus on domestic holdings. Additionally, the U.S. sports many more mega-cap companies, and that naturally populates the field with more American publicly traded firms. In total, 48 of the largest 100 global public companies are American, the same as last year.
Be that as it may, this year the rest of the world has made a modicum of progress, placing three in the top 18, compared with only one in the top 20 last year. All three of these foreign companies are big in emerging markets.
The top-ranked foreign company is Unilever (UN), at No. 11. For many years, it played second fiddle to Nestlé (NESN.Switzerland), No. 16, down seven notches from last year, but lately, the Anglo-Dutch food and household-products giant has made some inroads into investor consciousness.
As market values rise and fall, the list composition changes. Caterpillar (CAT) dropped off this year as its stock plunged nearly 20% from its high on fears of slowing Asian and European sales. In all, 15 companies fell off the list, including Spain's Telefonica (TEF) and Brazilian miner Vale (VALE), and 15 came aboard. Newcomers or returnees included Goldman Sachs (GS); apparel maker Inditex (ITX.Spain); and Gilead Sciences (GILD), a biotech firm.
What's the value of respect beyond the praise and excitement? The esteem that professional investors hold for a firm, or the lack of it, can be a useful tool in its evaluation.
Says Lloyd Khaner, chief investment officer of Khaner Capital: "There is value in investing in companies with high integrity. The likelihood is that they won't do bad things, very bad things, that will affect their stock prices."
Market history is rife with costly examples, from Enron and WorldCom back to John Law's Mississippi Bubble in France 300 years ago. For both companies and investors, it pays to remember that the ways to fall down the ranking are myriad, but the ways up, few.
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